Table Of ContentOECD Sovereign Borrowing Outlook 2012
Contents
Executive summary
Chapter 1. Sovereign borrowing overview
OECD Sovereign Borrowing
Chapter 2. Outlook for sovereign risk
Chapter 3. Impact of fi nancial contagion on borrowing operations within the euro area
Outlook 2012
Chapter 4. Changes in issuance procedures and techniques
Annex A. Principles and trade-offs when making issuance choices in the United Kingdom
Annex B. A suggested new approach to the measurement and reporting of gross short-term borrowing
operations by governments
Annex C. Methods and sources
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OECD Sovereign
Borrowing Outlook
2012
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FOREWORD
Foreword
Each year, the OECD circulates a survey on the borrowing needs of member
countries. The responses are incorporated in the OECD Sovereign Borrowing Outlook to
provide regular updates of trends and developments associated with sovereign borrowing
requirements and debt levels from the perspective of public debt managers. The Outlook
makes a policy distinction between funding strategy and borrowing requirements. The
central government marketable gross borrowing needs, or requirements, are calculated
on the basis of budget deficits and redemptions. The funding strategy entails decisions on
how borrowing needs are going to be financed using different instruments (e.g. long-
term, short-term, nominal, indexed, etc.) and distribution channels.
Accordingly, the OECD Sovereign Borrowing Outlook provides data and information
on borrowing needs and funding policies for the OECD area and country groupings,
including
• Gross borrowing requirements
• Net borrowing requirements
• Central government marketable debt
• Funding strategies and instruments
• Distribution channels
OECD Sovereign Borrowing Outlook 2012 is published this year for the first time as
a stand-alone publication (with a summary of Chapter 1 in OECD Journal: Financial
Market Trends Volume 2011/2). Previous articles on sovereign borrowing were
published in OECD Journal: Financial Market Trends Volumes 2009/1, 2009/2 and
2010/2. See for details www.oecd.org/daf/publicdebtmanagement. The Outlook is part of
the activities of the OECD Working Party on Public Debt Management, incorporated in
the programme of work of the Directorate for Financial and Enterprise Affairs’ Bond
Market and Public Debt Management Unit.
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OECD SOVEREIGN BORROWING OUTLOOK 2012 © OECD 2012
ACKNOWLEDGEMENTS
Acknowledgements
OECD Borrowing Outlook 2012 was prepared by a drafting group from the Bond
Market and Public Debt Management Unit in OECD’s Directorate for Financial and
Enterprise Affairs and comprised Hans J. Blommestein (Team Leader), Ahmet Keskinler
(Public Debt Analyst) and Perla Ibarlucea Flores (Research Assistant). Comments and
suggestions can be sent to Dr Hans J. Blommestein, Head of Bond Market and Public
Debt Management Unit, OECD, Paris, France, [email protected]
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OECD SOVEREIGN BORROWING OUTLOOK 2012 © OECD 2012
TABLE OF CONTENTS
Table of Contents
Preface by Angel Gurría, Secretary-General, OECD ...................................................................................... 7
Acronyms ..................................................................................................................................................... 9
Executive Summary .......................................................................................................................................... 11
Chapter 1. Sovereign borrowing overview ..................................................................................................... 13
1.1. A highly uncertain issuance environment: concerns about the recovery and growing sovereign risk .. 14
1.2. Evolution of budget deficits, sovereign borrowing and debt ................................................................. 16
1.3. Summary overview of the borrowing outlook for OECD country groupings ....................................... 18
1.4. The challenge of raising large volumes of funds with acceptable roll-over risk during periods
with changes in perceptions of sovereign risk ....................................................................................... 20
1.5. Funding strategy during periods of fiscal dominance and fiscal consolidation ..................................... 23
1.6. Central government debt at a glance ...................................................................................................... 25
Notes ............................................................................................................................................................... 26
References ....................................................................................................................................................... 28
Chapter 2. Outlook for sovereign risk ............................................................................................................ 29
2.1. Concerns about sovereign risk outlook is creating major challenges
for government borrowing operations ................................................................................................... 30
2.2. Widening of euro area spreads in the summer of 2011.......................................................................... 31
2.3. Market spotlight on Italy ....................................................................................................................... 35
2.4. Animal spirits pushing up borrowing rates? .......................................................................................... 36
2.5. Role of credit rating agencies ................................................................................................................ 37
2.6. Volatile markets are generating selling pressures and higher borrowing costs ..................................... 38
2.7. Definition and measurement of sovereign risk ...................................................................................... 42
2.8. Mispricing of sovereign risk? ................................................................................................................ 43
Notes ............................................................................................................................................................... 45
References ....................................................................................................................................................... 47
Chapter 3. Impact of financial contagion on borrowing operations within the euro area ........................ 49
3.1. Potential for contagion of the euro area crisis ....................................................................................... 50
3.2. Direct channels of contagion ................................................................................................................. 51
3.3. Indirect channels of contagion and impact on borrowing operations .................................................... 51
3.4. Vulnerability of a monetary union to liquidity crises ............................................................................ 52
Notes................................................................................................................................................................ 52
References ....................................................................................................................................................... 53
Chapter 4. Changes in issuance procedures and techniques ......................................................................... 55
4.1. The need to adjust issuance procedures and techniques ........................................................................ 56
4.2. OECD best practices as global standards? ............................................................................................. 56
4.3. Results from a recent survey on OECD issuance procedures and policies ............................................ 57
4.4. Issuance conditions amid a volatile and uncertain environment ............................................................ 60
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OECD SOVEREIGN BORROWING OUTLOOK 2012 © OECD 2012
TABLE OF CONTENTS
4.5. Responses to tougher issuance condition ............................................................................................... 60
Notes ............................................................................................................................................................... 64
References ....................................................................................................................................................... 64
Annex A. Principles and trade-offs when making issuance choices in the United Kingdom .................... 65
Annex B. A suggested new approach to the measurement and reporting
of gross short-term borrowing operations by governments ....................................................... 73
Annex C. Methods and sources ...................................................................................................................... 83
Glossary ............................................................................................................................................................. 87
Boxes
2.1. European Financial Stability Facility (EFSF) ............................................................................................ 34
2.2. Sovereign ratings ........................................................................................................................................ 39
A.1. Cost effectiveness considerations in the 2011-12 financing remit ............................................................. 67
A.2. Debt management considerations during the period of fiscal consolidation .............................................. 68
Figures
1.1. Fiscal and borrowing outlook in OECD countries for the period 2007-2012 ............................................. 15
1.2. Central government gross borrowing, interest payments and long-term interest rates ............................... 17
1.3. General government financial balance to GDP ratios in OECD countries ................................................. 18
1.4. Central government marketable gross borrowing as a percentage of GDP in OECD countries ................. 19
1.5. Medium-and long term redemptions of central government debt as a percentage
of GDP in OECD area and sub-groupings .................................................................................................. 21
1.6. Percentage of debt maturing in next 12, 24 and 36 months ........................................................................ 21
1.7. Average term to maturity ........................................................................................................................... 22
1.8. Maturity structure of gross-borrowing needs for OECD area .................................................................... 24
1.9. Central government marketable debt as percentage of GDP in OECD countries....................................... 25
1.10. Maturity structure of central government marketable debt for OECD area ............................................... 26
2.1. OECD General government gross debt and deficits, 2011 ......................................................................... 30
2.2. Ten-year benchmark bond spreads over Euro swap ................................................................................... 31
2.3. Ten-year CDS premia ................................................................................................................................. 32
2.4. Ten-year benchmark bond yield ................................................................................................................. 33
2.5. Redemption profile of Italian longer-term sovereign debt ......................................................................... 35
2.6. Ten-year benchmark bond yield ................................................................................................................. 36
2.7. General government fiscal and sovereign debt situation ............................................................................ 37
2.8. Interest payments as a percentage of GDP ................................................................................................. 41
2.9. Euro area ten-year government bond yield and spread to Bund ................................................................. 43
2.10. Standard deviation of ten-year euro area yield spreads to Bund ................................................................ 44
2.11. Volatility of ten-year benchmark yields ..................................................................................................... 44
A.1.1. Nominal spot curve (16 Mar 2011) ............................................................................................................ 67
A.1.2. Spread between five-year forward rate in five years and the five-year spot rate ........................................ 67
A.1.3. Real spot curve (16 Mar 2011) ................................................................................................................... 68
A.1.4. Inflation spot curve (16 Mar 2011) ............................................................................................................ 68
Tables
1.1. Central government gross borrowing and debt in the OECD area ............................................................. 16
1.2. Funding strategy based on marketable gross borrowing needs in OECD area ........................................... 24
3.1. Foreign claims on public sector .................................................................................................................. 51
4.1. Overview of issuing procedures in the OECD ........................................................................................... 58
4.2. Changes in issuing procedures ................................................................................................................... 62
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OECD SOVEREIGN BORROWING OUTLOOK 2012 © OECD 2012
PREFACE
Preface
This inaugural edition of the OECD Sovereign Borrowing Outlook 2012 is published
against a challenging global economic backdrop. Despite some encouraging signs in
sovereign debt markets and other indicators, the outlook remains highly uncertain. Failure
to prevent further contagion from the euro area sovereign debt crisis, renewed pressures
in the banking sector, and a growth slowdown in non-OECD economies all present risks
for the global economic recovery in the near term.
In this situation of great uncertainty, macroeconomic support, while strengthening
medium-term fiscal frameworks, is of crucial importance to restore confidence and
contain adverse feedback loops. Pro-growth structural reforms also need to be
implemented swiftly to improve the borrowing environment by reversing adverse shifts in
market sentiment and reducing the funding strains of sovereigns and banks.
OECD Sovereign Borrowing Outlook 2012 provides detailed information on the
unprecedented difficulties facing OECD countries in the markets for government
securities. The borrowing environment for governments (and corporate) issuers has
become even more difficult than usual due to the complications generated by sudden
shifts in sentiment and perceptions of risk associated with certain sovereigns: the so-
called swings in the ‘risk-on’ and ‘risk-off’ trades. Raising large volumes of funds at
lowest cost with acceptable roll-over risk remains a great challenge for a wide range of
governments.
The Borrowing Outlook outlines strategies and operations for dealing with these
challenges. Most OECD debt managers are continuing to rebalance the profile of debt
portfolios by issuing more long-term instruments and moderating the issuance of short-
term debt.
Sound debt management and a balanced macroeconomic policy mix are key
requirements for governments to be able to borrow at sustainable yields and to implement
better policies to put the global economy back on a path of sustainable growth.
Angel Gurría
OECD Secretary-General
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OECD SOVEREIGN BORROWING OUTLOOK 2012 © OECD 2012
